John R. Graham is a financial, economic, and policy analyst in the health sector. His appointments include:
Senior Fellow of The National Center for Policy Analysis;
Senior Fellow of The Independent Institute;
Senior Fellow of the Pacific Research Institute;
Senior Fellow of The Fraser Institute;
Adjunct Scholar of The Mackinac Center for Public Policy;
Columnist at Forbes.com's The Apothecary blog;
Member of the Board of Visitors of The Benjamin Rush Society of medical students and physicians.

White House: It's A Good Thing That Obamacare Will Drive 2.5 Million Americans Out Of The Workforce

Yesterday, Washington’s official non-partisan bean-counter, the Congressional Budget Office, dropped a bomb. By 2024, says the CBO, Obamacare will reduce the size of the U.S. labor force by 2.5 million full-time-equivalent workers. That’s roughly triple what the CBO had estimated three years ago. Such a sizeable decline in the labor force will have substantial detrimental effects on the U.S. economic and fiscal picture. But the CBO wasn’t responsible for the most amazing thing that happened yesterday. That title belongs to the Obama White House, where Press Secretary Jay Carney claimed that 2.5 million Americans leaving the workforce was a good thing, because they would no longer be “trapped in a job.”

How Obamacare shrinks the labor market

Here’s what happened. In its annual, 182-page Budget and Economic Outlook, the CBO undertook an overhaul of the way it analyzes the effect of Obamacare on the job market. The new, larger estimate of the law’s negative impact on the labor force derives from three factors: (1) Obamacare’s employer mandate, which will discourage hiring and reduce wages offered by employers; (2) Obamacare’s $1 trillion in tax increases, which will discourage work and depress economic growth; and (3) the law’s $2 trillion in subsidies for low-income individuals, which will discourage many from remaining in the labor force.

Let’s focus on that last point, because it’s the one that has been the least-discussed in the media. In the past twelve months, a spate of research from academic economists has concluded that the health law, by offering economic benefits to low-income individuals, will disincentivize some of these individuals from continuing to work. Casey Mulligan of the University of Chicago has been particularly persuasive on this front, publishing two papers with the National Bureau of Economic Research.

Several economists, like Harvard’s Kate Baicker, MIT’s Amy Finkelstein, Texas A&M’s Laura Dague, and Northwestern’s Craig Garthwaite have found that expanding Medicaid is associated with rising unemployment. “Taking that research into account, CBO estimates that expanded Medicaid eligibility under the ACA will, on balance, reduce incentives to work.”

More significantly, as Casey Mulligan has warned, the new subsidized insurance exchanges will allow low-income workers to work less while maintaining the same effective income: what economists call the income effect. In addition, because the subsidies decline on a sliding scale as you make more money, that sliding scale means that as workers work more, they make less per hour worked: what economists call the substitution effect.

When Mitt Romney signed his health-reform legislation in Massachusetts in 2006, economists didn’t discern a substantial impact on the labor market. That led many Obamacare cheerleaders to dismiss concerns that the law would depress the workforce. But Mulligan observes that the Massachusetts law did not have a meaningful impact on income tax rates, unlike Obamacare. The ACA “increases national rates about 12 times as much as the Massachusetts law increased rates,” notes Mulligan; “among other things, [Massachusetts’] employer penalty is an order of magnitude less.”

CBO staff, to its credit, read the sheaf of new research on this topic, and revised its estimates accordingly. Hence all the hubbub about the new report. But wait—there’s more!

Carney: Americans should stop working ‘to pursue their dreams’

After the CBO review came out, White House Press Secretary Jay Carney published a statement in which he declared, remarkably, that it’s a good thing that millions of Americans may drop out of the work force:

Over the longer run, CBO finds that because of this law, individuals will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families. At the beginning of this year, we noted that as part of this new day in health care, Americans would no longer be trapped in a job just to provide coverage for their families, and would have the opportunity to pursue their dreams.

Bored with your job? No worries—now you can quit, thanks to the generosity of other taxpayers. Want to retire early? No worries—now you can, thanks to the generosity of other taxpayers, and also thanks to the higher premiums that young people will be forced to pay on your behalf. The White House’s apparently sincere belief—echoed by progressive pundits at MSNBC, The New Republic, and the L.A. Times—is that it’s a good thing for fewer Americans to be economically self-sufficient.

If you’re one of the chumps out there who still toils away at a challenging job, and still pays taxes so that others can “pursue their dreams,” you have a right to resent the White House’s argument. And the “dream-pursuers” themselves should become aware of all the research suggesting that earned success, through hard work, is the most reliable path to true happiness.

Participation in the labor force was already declining, thanks to the poor economy and the retirement of the Baby Boomers. Obamacare, it appears, will accelerate that process, forcing fewer and fewer taxpayers to support a greater number of government beneficiaries.

No universal-coverage plan is immune from this problem

I should issue two caveats before I go on: any health-reform plan that seeks to offer coverage to the uninsured will have this type of effect on the labor market. As Josh Barro notes, the new Republican plan to replace Obamacare offered by Senators Tom Coburn (Okla.), Richard Burr (N.C.), and Orrin Hatch (Utah) also has a means-tested subsidy to help the poor buy health insurance.

In addition, it is genuinely a good thing for us to move to a system where people control their own health dollars and their own health coverage, and aren’t stuck at a job because they’re afraid of losing the coverage they have. But giving people the opportunity to switch jobs is quite a different goal from encouraging them to drop out of the work force altogether.

The negative effect of Obamacare on the labor market is far worse than any Republican alternative would be, because the ACA dramatically expands Medicaid, and because the law heavily subsidizes health insurance for those nearing retirement. In addition, Obamacare depresses economic growth through a $1 trillion tax increase, and increases the cost of hiring new workers, because of its employer mandate requiring most businesses to offer health coverage to every worker.

The CBO report harbors more bad news

The new CBO report contained a lot of other interesting information. CBO projects that economic growth will be more sluggish than they had previously projected. From 2018 to 2023, nominal GDP growth will average 4.2 percent, compared to the CBO’s previous estimate of 4.4 percent. Over the same period, unemployment will average 5.6 percent, higher than the previous estimate of 5.4 percent.

Because of this slower economic growth, CBO projects that from 2014 to 2023, the federal government will receive $1.4 trillion less in tax revenue than it had projected last year. As a result, “CBO now estimates that the cumulative deficit for the 2014-2023 period…would be about $1.0 trillion greater than it projected in May [2013].”

Think about that for a second. Obamacare increased taxes by $1 trillion over ten years. Democrats have passed several other tax hikes under President Obama. And yet all of that planned new tax revenue has been offset by the poor economic growth that the President’s tax hikes, in part, have engendered.

Some on the right complain that Obamacare is a scheme for wealth redistribution. In truth, Obamacare is a scheme for wealth destruction.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

the CBO is well recognized as being unslanted, unbiased, and accurate in its facts. You can not like the article, but what are you going to do with the CBO’s report? It’s really bad news, not like it’s something we didn’t know before, but this confirms it from an UNBIASED source

You apparently don’t understand how people thing or how economics work. The ramifications of Obamacare is more than deficit burdens, economic upheaval but social engineering on a scale that is dangerous.

On Labor Day 2013, Welfare Pays More Than Minimum-Wage Work In 35 States (Part 1) Charles Murray launched the welfare reform movement in 1984 with his landmark book, Losing Ground: American Social Policy 1950-1980. (Photo credit: Gage Skidmore) Since 2009, the Fair Labor Standards Act has dictated that the federal minimum wage is $7.25 an hour. Some people think that’s too low; others think it’s too high. But it turns out that, in 35 states, it’s a better deal not to work—and instead, to take advantage of federal welfare programs—than to take a minimum-wage job. That’s the takeaway from a new study published by Michael Tanner and Charles Hughes of the Cato Institute. “The current welfare system provides such a high level of benefits that it acts as a disincentive for work,” Tanner and Hughes write in their new paper. “Welfare currently pays more than a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit,” which offers extra subsidies to low-income workers who take work. “In 13 states [welfare] pays more than $15 per hour.” Losing ground in the war on poverty The welfare system, at its best, is a system that gives people a way to live when they can’t find work for themselves, when they’re down on their luck. At its worst, the welfare system rewards people for not working, and incentivizes people to develop habits that make it harder for them to find work in the future, miring them in permanent poverty.

In 1984, a predecessor of mine at the Manhattan Institute, Charles Murray, published the definitive book on this subject, Losing Ground: American Social Policy 1950-1980. Murray found that despite the fact that we were spending trillions of dollars on anti-poverty programs, poverty was not improving; indeed, on many measures, it was getting worse. Things had gotten so bad that a Democratic presidential candidate, Bill Clinton, campaigned in 1992 on a platform to “end welfare as we know it, to make welfare a second chance, not a way of life.” In 1996, Clinton signed into law a landmark welfare-reform bill called the Personal Responsibility and Work Opportunity Reconciliation Act, which, among other things, required recipients of cash welfare payments to seek work, or lose their benefits. But though the 1996 reforms did shrink the cash welfare rolls, other programs have grown substantially in the last 17 years, so much so it appears that the significance of the 1996 reforms may have been overstated. The welfare system has grown since 1996 In 1995, Cato published The Work vs. Welfare Trade-Off, which examined the value of welfare benefits in every state. They found that, in 40 states, welfare paid more than $8 an hour; in 17 states, welfare paid more than $10 an hour. Tanner, the principal author of that study, decided to reexamine the numbers in the context of 2013. In Cato’s new 2013 study, welfare paid more than $10 an hour in 33 states; 17 paid less than $8 an hour. Comparing the two data sets and accounting for inflation, 18 states saw a decline in the total value of welfare benefits; 32 states and the District of Columbia saw increases. Tanner and Hughes award the national welfare championship to Hawaii, which offers $60,590 in annual welfare benefits, once you account for the fact that welfare benefits are tax-free to the recipient, compared to work-related wages. That’s the equivalent of $29.13 an hour. Rounding out the top five were D.C. ($50,820 per year and $24.43 an hour), Massachusetts ($50,540 and $24.30), Connecticut ($44,370 and $21.33), and New York ($43,700 and $21.01). States with the lowest welfare benefits were Idaho ($11,150 and $5.36), Mississippi ($11,830 and $5.69), Tennessee ($12.120 and $5.83), Arkansas ($12,230 and $5.88), and Texas ($12,550 and $6.03). Vermont increased welfare payments by the largest amount The biggest jump in welfare payments between 1995 and 2013 was enjoyed by Vermont, where annual pre-tax-equivalent benefits jumped from $31,580 to $42,350 in 2013 dollars: an increase of $10,770. Other big gainers were D.C. ($6,850), Hawaii ($5,589), New Hampshire ($5,299), and Oregon ($5,288).

On Labor Day 2013, Welfare Pays More Than Minimum-Wage Work In 35 States (Part 1) The biggest decrease was in Alaska, where benefits dropped from $48,655 to $26,400, a difference of $22,255. The other major belt-tighteners were Virginia (-$20,035), Maine (-$18,718), Colorado (-$16,830), and Idaho (-$16,048). Tanner and Hughes count 126 distinct federal means-tested anti-poverty programs in force today. For the purposes of their study, they looked specifically at: (1) Temporary Assistance for Needy Families (TANF), the post-1996 cash welfare program; (2) the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps; (3) Medicaid; (4) housing assistance; (5) utilities assistance; (6) the Women, Infants, and Children program (WIC), and (7) the Emergency Food Assistance Program (TEFAP). Not all of these benefits apply to every welfare beneficiary, and some are time-limited, like TANF. But it remains true that an alarming number of welfare beneficiaries do not have an economic incentive to find entry-level work. Also striking about the Tanner and Hughes study is the degree to which this problem would be much worse without the Earned Income Tax Credit, which offers subsidies to working low-income individuals. In effect, the EITC serves as a negative income tax for those with little-to-no income tax liability. It ameliorates the disincentive that welfare recipients have to seek work. The Swedish solution: Tax welfare benefits A better way to address this problem would be to treat welfare benefits like taxable income. Even low-income workers with no income tax liability have to pay Social Security and Medicare taxes. But welfare benefits are entirely tax-free. As Reihan Salam has noted, Sweden has a generous welfare state. But Sweden treats welfare benefits as taxable income. This gives even welfare beneficiaries an incentive to support efficient government, providing a welcome blur between “makers” and “takers.” In Sweden, according to Tino Sanandaji, “an astonishing 85 percent of working-age native Swedes work and pay taxes, far above the European average of 70 percent.” You could even increase the scale of welfare benefits, in order to ensure that the taxable net income to welfare beneficiaries remained similar. Such a change would allow for more straightforward comparisons of income from work and income from welfare, and reduce the disincentive for work. Obamacare is doing much to make it harder for Americans to find work, especially full-time work. At the same time, the aging of the Baby Boomers and the growth in welfare payments is making it easier for Americans to give up on looking for work. Absent reform, this won’t end well. 9/02/2013 @ 11:50AM Avik Roy Forbes

Pretty funny, a liberal like you, when confronted with reality (something liberals constantly hide from) you spew mindless denials of fact. No wonder liberals pass policies that alwyas end up looking like a dog’s dinner.